Inside Markets — Eye on the Fed

The risk into tomorrow’s core PCE print is skewed to the upside given the hotter-than-expected July PPI report two weeks prior. A hot PCE report would only confirm what investors already know, while a cooler print would fuel expectations for further Fed easing beyond the September meeting. Market-based probability for a September rate cut is now at ~85%, though there are still important catalysts ahead including the August Jobs Report (9/5) and August CPI print (9/11). In our view, August non-farm payrolls would need to exceed +175,000 (July was +73,000) to derail a September rate cut, while a hot August CPI report would likely get a pass given the transitory nature of tariff-related price adjustments.

The Russell 2000 (RTY) caught our attention when it broke above technical resistance at 2309 in mid-August. The index is up +7.3% so far in August but is still ~3% below the all-time high of ~2443 from 11/8/21. The RTY has underperformed the SPY by ~39% over the last five years, which is the widest performance differential in history. A potential ‘catch up trade’ represents a significant opportunity, but we think this requires a prolonged Fed easing cycle (typically triggered by a steep slowdown or ‘mission accomplished’ on inflation). The most recent flash PMI data suggests neither outcome is likely over the next 3-6 months.